Designing Nepal’s Sovereign Wealth Fund: The Case for a Sequenced Dual Mandate

10 July 2026, NIICE Commentary 12629
Arman Sidhu

The budget for fiscal year 2026/27, presented on 29 May 2026 by Finance Minister Swarnim Wagle, proposed that Nepal establish a sovereign wealth fund. Nepal Rastra Bank (NRB), the central bank, has since begun a study to determine the fund’s structure, and Governor Bishwo Nath Poudel has publicly backed the plan. The proposal responds to a real anomaly. Nepal holds reserves of more than USD24 billion, enough to cover over 18 months of imports, while those reserves earn roughly 4 percent each year in low-yield instruments.

The more consequential question concerns what kind of fund Nepal should build. The global record shows that the design of a sovereign wealth fund, far more than the size of the windfall that seeds it, determines whether the fund compounds national wealth or erodes it.

The Governance Variable

The funds that have succeeded share a common architecture. Norway’s Government Pension Fund Global, the largest in the world, invests only abroad, preserves its principal, and caps annual withdrawals at the fund’s expected real return under a fiscal rule. Management is delegated at arm’s length to Norges Bank Investment Management. 

Singapore operates two complementary institutions. The Government of Singapore Investment Corporation (GIC) manages reserves passively across global markets, and Temasek holds commercial equity stakes under a mandate that bars the government from directing individual investment decisions. 

Ireland’s Strategic Investment Fund built its model around a commercial-return test paired with an economic-impact test, with private capital committed alongside public money on every domestic investment. The funds that have failed share an equally consistent signature. Malaysia’s 1MDB borrowed heavily, routed money through related parties, and collapsed amid the misappropriation of billions, eventually bringing down a government. Angola’s sovereign fund, chaired by the son of the then president, placed roughly USD3 billion with a firm owned by his close business associate. Libya’s Investment Authority has been defined by political appointment and mismanagement for nearly two decades. 

A clear legal mandate, separation from the annual budget cycle, professional management insulated from political appointment, transparency, and a prohibition on leverage and related-party dealing form the substance of the Santiago Principles, the international standard for sovereign fund governance.

These funds differ enormously in scale and mandate, a contrast that matters for calibrating Nepal’s expectations.

Figures are approximate, compiled from each fund’s most recent public reporting; Nepal’s output is taken from the 2025/26 national accounts.

Model Policy: Nepal vs Norway

The temptation to model a Nepali fund on Norway’s should be resisted, because the two countries hold reserves of fundamentally different character. Norway’s capital originates as state revenue from petroleum, foreign currency that accrues directly to the government and never enters the domestic economy. Nepal’s reserves originate as remittances from migrant workers, now estimated at 33 percent of gross domestic product (GDP) and the highest on record. They are intermediated through the banking system and accumulated by NRB through intervention to maintain the rupee’s peg to the Indian rupee (INR).

Two consequences follow. First, the capital is reversible. Petroleum rents accrue for decades and can endow a permanent savings fund for future generations. Remittance inflows can contract within a single year if labour markets in the Gulf, the West, or South and Southeast Asia weaken. That volatility means reserves cannot safely anchor the kind of perpetual endowment Norway maintains. 

Former NRB executive director Nara Bahadur Thapa has characterised the present moment as one of “full reserves but no investment,” a condition that reflects weak domestic demand rather than durable national saving. Former finance secretary Madhu Kumar Marasini has likewise argued that the reserves should be put to productive use, while cautioning that they are temporary and should not be treated as government revenue.

Second, the reserves are already performing monetary work. They back the currency peg and provide import cover. Deploying them abroad in higher-yielding assets leaves that monetary function intact, because the assets remain external. Converting them into domestic-currency spending does not. 

That conversion is quasi-fiscal expansion, it injects money into the economy, and under a fixed exchange rate it pressures both prices and the external buffer. The distinction between investing reserves abroad and spending them at home therefore carries real weight. It marks the boundary between sound reserve management and disguised deficit financing.

The Case for a Dual Mandate

A fund suited to Nepal’s conditions would operate two distinct sleeves under a single legal structure, governed by different rules because they carry different risks. The external sleeve would take the genuinely surplus portion of reserves, the amount above a prudent import-cover floor, and invest it passively across diversified global markets. The objective is modest and achievable: a risk-adjusted real return above the 4 percent the reserves currently earn, captured through low-cost index exposure rather than active speculation. 

This sleeve carries little controversy and no monetary risk, because the assets stay abroad. It is ordinary reserve management practised by many central banks and reserve-investment corporations. It also aligns with Nepal’s near-term fiscal position. Concessional finance is contracting as the country approaches graduation in November 2026 from least developed country (LDC) status, a step the government has asked to postpone to 2029. Major United States aid programmes have also been terminated.

The internal sleeve is where most sovereign funds fail, and where Nepal’s should proceed last and slowly. A development sleeve would commit capital to domestic priorities in hydropower, transmission, or transport. It can be defensible only under the guardrails that matter most in governance: an arm’s-length investment committee, a commercial-return floor on every commitment, mandatory co-investment from private or multilateral partners, and published reporting against international transparency standards. 

Absent those conditions, a domestic sleeve becomes directed lending under another name, exposed to the uneconomic projects and soft budget constraints that have characterised state-led investment in Nepal before. The International Monetary Fund (IMF) has long cautioned that sovereign funds are generally not suited to domestic investment, precisely because of the inflation and exchange-rate effects that follow.

Sequencing the Fund

The sequencing matters more than the structure. The disciplined course is to establish the external sleeve first, allow it to demonstrate arm’s-length governance and transparent reporting over several years, and treat the domestic sleeve as a capacity that must be earned rather than a feature installed at inception. 

The institutional groundwork is unfinished. Nepal remains on the Financial Action Task Force (FATF) grey list, where it was placed in February 2025 and retained at its June 2026 review. The IMF’s 2026 Article IV consultation made NRB Act amendments on central bank independence a structural benchmark. 

The current government has also signalled appetite for state-led ventures, including a Matribhumi Fund to hold strategic assets such as a planned artificial intelligence facility. Those conditions strengthen the case for proving governance on external assets before any domestic deployment, not after. Whether the fund compounds national wealth or repeats the failures recorded across two decades of sovereign investment will depend on a single discipline: building the institution before deploying the capital, and earning the right to invest at home by first managing prudently abroad.

Arman Sidhu is an American geopolitical analyst and writer covering commodities markets, international trade, and foreign investment.