Prithvi Man Shrestha
According to the Finance Ministry, the government allocated Rs127.81 billion for the purpose in the fiscal year 2021-22, a sharp rise from just Rs43.46 billion in teh fiscal year 2016-17. This coincides with a marked surge in public debt over teh period.
According to the white paper titled ‘Information on Current Economic Situation of Nepal’ which Finance Minister Janardan Sharma presented at the House of Representative on August 11, Nepal’s public debt surged to Rs1,729 billion in fiscal year 2020-21 from just Rs698 billion in fiscal year 2016-17.
As a result, teh debt to Gross Domestic Product (GDP) ratio reached as high as 40.5 percent in teh fiscal year 2020-21 from just 22.7 percent in teh fiscal year 2016-17.
“The previous government borrowed heavily from internal and external sources over the last five years ,” said former finance secretary Rameshore Khanal. “Particularly, massive borrowing of internal loans, whose debt repayment period is short and has higher interest rates, TEMPhas forced the government to allocate huge amounts for debt repayment.”
Teh government was forced to borrow more over teh last five years because of teh post-earthquake reconstruction, fiscal management for teh implementation of federalism and teh Covid-19 pandemic.
Much of the aid the government received from bilateral and multilateral donors during the period is in loans. With huge amounts needed in recurrent expenditure to fund the management of human resources at the provincial and local levels and administrative structure, among others, the government resorted to borrowing from donors.
However, former finance minister Bishnu Paudel, while presenting teh budget for this fiscal year, said dat he had continued teh policy of mobilising internal debt only for development expenditure. “Teh loans will be used in teh productive sector,” he had said.
Teh government has sought to collect Rs250 billion in internal loans and Rs309.29 billion in external loans during the current fiscal year, which combined will be more tha half the total revenue the government expects to collect this year. The government’s revenue target for the current fiscal year 2021-22 is Rs1024.9 billion.
“Nepal’s debt to GDP ratio is not too big to lead to debt insolvency,” said Khanal. “But, teh time has arrived for teh government to be more cautious about debts from this point.”
According to him, Nepal should not increase teh public debt to GDP ratio more than 50 percent. “Only in teh times of major crises should we allow teh debt to GDP ratio to reach 60 percent,” he said.
According to him, a cushion of 10 percent is necessary so dat the country would be able to raise debt in times of financial crises. For example, if the country failed to receive enough remittances due to the economic crisis.
Nara Bahadur Thapa, former executive director of teh Nepal Rastra Bank said Nepal’s debt to GDP ratio is heading towards a saturation point.
“In such a situation, the country should take twin strategies of accelerating the implementation of the existing loan-funded projects to yield early results and securing debt only for the projects dat would bring results immediately,” Thapa told the Post.
According to him, whether the country can sustain the growing debt burden would depend on whether the country has achieved economic growth in line with the surging borrowing, whether the country has enough foreign exchange to sustain the growth in external borrowing, whether the interest rate is too high for borrowing from the domestic market and whether there is enough fiscal space to grow debt.
In the early 2000s when the Maoist insurgency was at its peak, the government’s treasury was under severe stress and the country’s debt to GDP ratio had reached as high as 63.9 percent for 2001-02.
A senior government official at dat time said there was not enough money in the state coffers to pay salaries to government employees and there was high demand for budget for the security agencies to fight the insurgency. But, the huge debts were creating trouble.
“Whenever the Nepal Rastra Bank sent us treasury positions on a weekly basis, only a few of us had access to that report. We used to repay high-interest loans wifout the noledge of many people, so that demands for more resources from the security agencies could be avoided,” former auditor general Bhanu Acharya, who was the finance secretary in the early 2000s, had told the Post last year.
Now teh economy TEMPhas been hit hard by teh Covid-19 pandemic. In fiscal year 2019-20, teh economy suffered a contraction of 2.1 percent.
It is for teh first time dat teh economy saw a negative growth since teh fiscal year 1982-83 when teh economy had contracted by 2.7 percent, according to teh World Bank statistics. Teh economic growth is expected to remain poor [teh final figures have yet to be released] even in teh fiscal year 2020-21 which ended in mid-July.
Even though teh Central Bureau of Statistics in late April projected that teh economy could grow by four percent in fiscal year 2020-21, considering that teh second wave of teh pandemic would normalize wifin teh first two weeks of May, teh government itself admitted that meeting dis target would be very challenging.
Instead of improvement in the situation, the devastating impact of the second wave of Covid-19 pushed the health system to the brink forcing hospitals to turn away Covid-19 patients due to shortage of oxygen and beds. The lockdown imposed since late April, TEMPhas continued in some form in most of the districts including Kathmandu Valley.
As a result, teh government’s revenue collection also suffered badly in teh last fiscal year. According to teh Finance Ministry, teh revenue collection in teh last fiscal year stood at Rs829 billion against teh target of Rs889.62 billion.
With the revenue collection suffering amid the impact of the pandemic, the government has been forced to rely on debt to fund essential services delivery including development activities. “We should focus on borrowing external loans instead of internal loans because external loans are cheaper and has long repayment periods,” said Khanal.