Budgetary allocations for the payment of internal and external debts soared almost three times in the last five years.
According to the Ministry of Finance, the government allocated 127.81 billion rupees for the purpose in fiscal year 2021-22, a sharp increase from just Rs 43.46 billion in fiscal year 2016-17. This coincides with a marked increase in public debt during the period.
According to the white paper entitled ‘Information on the current economic situation of Nepal’ As Finance Minister Janardan Sharma introduced in the House of Representatives on August 11, Nepal’s public debt increased to Rs 1,729 billion in fiscal year 2020-21 from just Rs 698 billion in fiscal year 2016-17.
As a result, the debt / Gross Domestic Product (GDP) ratio reached as high as 40.5 percent in fiscal year 2020-21 from just 22.7 percent in fiscal year 2016-17.
“The previous government borrowed heavily from internal and external sources over the past five years,” said former finance secretary Rameshore Khanal. “In particular, the massive borrowing of domestic loans, whose debt repayment period is short and have higher interest rates, has forced the government to allocate huge amounts for debt repayment.”
The government was forced to borrow more over the past five years due to post-earthquake reconstruction, fiscal management for the implementation of federalism, and the Covid-19 pandemic.
Much of the aid the government received from bilateral and multilateral donors during the period is in the form of loans. Since huge amounts of recurring costs were needed to finance provincial and local human resource management and administrative structure, among others, the government turned to donor loans.
However, former Finance Minister Bishnu Paudel, presenting the budget for this fiscal year, he said that he had continued with the policy of mobilizing domestic debt only for development spending. “The loans will be used in the productive sector,” he had said.
The government has sought to collect 250 billion rupees in internal loans and Rs 309,290 crore in external loans during the current fiscal year, which combined will be more than half of the total revenue the government expects to raise this year. The government revenue target for the current fiscal year 2021-22 is Rs 1024.9 billion.
“Nepal’s debt-to-GDP ratio is not too great to lead to debt insolvency,” Khanal said. “But, the time has come for the government to be more cautious with debts from this point on.”
According to him, Nepal should not increase the public debt-to-GDP ratio by more than 50 percent. “Only in times of major crisis should we allow the debt-to-GDP ratio to reach 60 percent,” he said.
According to him, a 10 percent cushion is necessary so that the country can borrow in times of financial crisis. For example, if the country was unable to receive enough remittances due to the economic crisis.
Nara Bahadur Thapa, former CEO of Nepal Rastra Bank, said Nepal’s debt-to-GDP ratio is heading towards saturation point.
“In such a situation, the country should adopt twin strategies of accelerating the implementation of projects financed with existing loans to produce early results and securing debt only for projects that would bring immediate results,” Thapa told the Post.
According to him, whether the country can sustain the growing debt burden will depend on whether the country has achieved economic growth in line with the increase in debt, whether the country has enough foreign exchange to sustain the growth of external debt, whether the rate of Interest is too high to borrow in the domestic market and if there is enough fiscal space to increase debt.
In the early 2000s, when the Maoist insurgency was at its peak, the government treasury was under severe strain and the country’s debt-to-GDP ratio had reached 63.9 percent in 2001-02.
A senior government official at the time said that there was not enough money in the state coffers to pay the salaries of government employees and that there was a high budget demand for security agencies to fight the insurgency. But the huge debts were creating problems.
“Whenever Nepal Rastra Bank sent us cash positions on a weekly basis, only a few of us had access to that report. We used to repay high-interest loans without the knowledge of many people, so that demands for more resources from security agencies could be avoided, ”former auditor general Bhanu Acharya, who was finance secretary in early 2000, told the Post. the 2000s. last year.
Now the economy has been hit hard by the Covid-19 pandemic. In fiscal year 2019-20, the economy suffered a contraction of 2.1 percent.
It is the first time the economy experienced negative growth since fiscal year 1982-83, when the economy contracted 2.7 percent, according to World Bank statistics. Economic growth is expected to remain poor [the final figures have yet to be released] even in the 2020-21 fiscal year that ended in mid-July.
Even though the Central Bureau of Statistics in late April projected that the economy could grow by four percent in fiscal year 2020-21, considering that the second wave of the pandemic would normalize within the first two weeks of May, the government itself admitted that meeting this objective would be very challenging.
Instead of improving the situation, the devastating impact of the second wave of Covid-19 pushed the healthcare system to the limit, forcing hospitals to turn away Covid-19 patients due to oxygen and bed shortages. The blockade imposed since the end of April has continued in some form in most districts, including the Kathmandu Valley.
As a result, government revenue collection also suffered greatly in the last fiscal year. According to the Ministry of Finance, revenue collection in the last fiscal year stood at 829 billion rupees against the goal of Rs 889.62 billion.
With revenue collection suffering amid the impact of the pandemic, the government has been forced to rely on debt to finance the provision of essential services, including development activities. “We should focus on borrowing from outside rather than from inside because outside loans are cheaper and have long repayment periods,” Khanal said.