When government spending exceeds revenue, the shortfall is met through domestic and external debt, which is repaid by generating additional revenue. More debt in the present implies more taxes in the future, making the economy less attractive to domestic and external investors. As economies across the globe compete for foreign investment, potential investors will look for environments where there are fewer expectations of future tax increases. More spending is needed to expedite economic development. And that is financed by increasing revenue and debt on the part of the government. However, besides discouraging investment, excessive debt could lead to internal, external and financial sector instability and debt servicing problems in the future.

Suppose the rate of growth of debt is higher than the nominal growth of the gross domestic product (GDP) and the growth of exports of goods and services. In that case, we can surmise that the debt cannot contribute to the expected expansion of the economy, which could create unsustainability in future debt financing and debt servicing. Hence, debt is not only a source of spending; but if not managed properly, may also serve as a source of fiscal, financial and economic crises. Imprudence and unprofessional debt management, therefore, could lead to severe economic disaster.

In developing countries, debt management is least prioritised by governments as if debt comes as a free lunch and the need for servicing it will not arise in the future. During their available uncertain tenure, insensitive governments contract all accessible debt resources as the responsibility for servicing these debts will fall on future governments. When debt liabilities pile up every year due to inadequate mobilisation of internal non-debt resources, there could be fiscal or debt-related disasters sometime in the future. Thus, irresponsible governments can easily drive the country into a situation of debt trap or debt crisis.

The government will easily escape accountability for the debt-related crisis in the name of development. Consequently, the development process will suffer a severe setback and the underdeveloped status of the country will hardly see any improvement. So, extreme care, transparency, and accountability should be ensured in designing the debt management objective, strategy and process, and execution. In Nepal, gross irresponsibility in fiscal practice in general and debt management in particular during the last four years means that its future debt servicing problems will become severely acute, if not unsustainable.

The data

The government of Nepal’s outstanding debt rose from Rs540.4 billion in mid-July 2013 to Rs697.7 billion in mid-July 2017 and to Rs1,608.4 billion in mid-June 2021, registering an annual compounded increase of 6.6 percent in the previous four years (2013-14 to 2016-17) and 23.2 percent in the latter four years (2017-18 to 2020-21). Of the outstanding debt in mid-June 2021, domestic debt comprised 45.1 percent and external debt comprised 54.9 per cent. The real GDP growth averaged 4.0 percent during the latter four years while such growth during the previous four years averaged 4.8 percent. Further, as a percent of the GDP, outstanding debt declined from 27.7 per cent in mid-July 2013 to 22.7 percent in mid-July 2017, which, however, rose by a whopping 15.0 percentage points to 37.7 percent in mid-June 2021.

Similarly, the per capita outstand- ing debt, which amounted to Rs19,868 (outstanding debt Rs540.4 billion divided by the population of 27.2 million) in mid-July 2013, increased by an annual rate of 5.2 percent to reach Rs24,310 (outstanding debt Rs697.7 billion divided by the population of 28.7 million) in mid-July 2017. Further, during the latter four-year period, the per capita outstanding debt soared by an annual rate of 21.6 percent to reach Rs53,083 (outstanding debt Rs1,608.4 billion divided by the population of

30.3 million) in mid-June 2021. Despite such a rise in debt, the public sector gross fixed capital formation/GDP ratio (in percent) decelerated from 12.5 in 2016-17 to 9.9 in 2017-18, 8.3 in 2018-19, 7.7 in 2019-20 and 7.0 in 2020-21, marking a reduction of 5.5 percentage points between 2016-17 and 2020-21.

The lesson

The latter four years witnessed a rapid growth of the outstanding debt with an annual average increase at 23.2 per-cent, 15 percentage points rise as a ratio of GDP and 21.6 percent annual average growth of per capita outstand- ing debt. During the previous four years, there was an average yearly rise of outstanding debt at 6.6 percent, 5.0 percentage points decline as a ratio of GDP and 5.2 percent average yearly growth of per capita outstanding debt. Despite the substantial rise in debt during the latter four years, the average annual GDP growth at 4.0 percent was lower than the 4.8 percent growth during the previous four years.

The public sector gross fixed capital formation/GDP ratio (in percent) consistently decelerated from 12.5 in 2016- 17 to 7.0 in 2020-21, showing a reduction of 5.5 percentage points between 2016-17 and 2020-21. The deficit in goods and services trade worsened, with the deficit as a percent of GDP averaging 37.2 in the latter four years, compared to 35.8 percent in the previous four years. The continuation of such trends could ultimately lead to problems in debt servicing. This discussion raises a pertinent question: Where did the debt-money go or who stole the debt money? There could be an attempt to find an excuse by shifting one’s irresponsibility to the Covid-19 lockdown, which adversely affected private-sector movement more than government sector movement which was largely unrestricted.

Covid-19 did not eat up the debt money, did it? A thorough study of the debt resources received and their (mis)use during the last four years, therefore, needs to be undertaken to identify the truth behind the missing debt money and punish those guilty of bringing about such an irresponsible state in the country’s debt situation.