With its financial condition improving, loans overtake grants in Nepal’s foreign aid portfolioHowever, government officials and experts say the country’s current debt situation is comfortable.
While this has contributed to an increased indebtedness, there is no threat to Nepal’s economy at the moment as there is still a lot of scope for borrowing more, say government officials.
According to the Development Cooperation Report 2018-19, as much as 60 percent of the total foreign aid disbursed by donors in the fiscal year 2018-19 were loans while the portion of grants stood at 27 percent and the portion of technical assistance at 13 percent.
Nepal had received a total of $1.79 billion foreign aid in the last fiscal year and the portion of loans stood at $944 million.
In the fiscal year 2017-18, the portion of loans had crossed 50 percent for the first time in the last several years, standing at 50.5 percent.
Ever since the Finance Ministry started publishing the Development Cooperation Report in the fiscal year 2010-11, the portion of grants had remained higher than that of loans.
In fiscal 2013-14, the portion of grant received by the country was 66 percent, which gradually decreased in the following fiscal years, the Finance Ministry’s reports over the period show.
The ministry has attributed the rise in loans to multilateral development banks such as the World Bank and Asian Development Bank increasing proportion of loans rather than grants, citing Nepal’s improved loan repayment capacity. The two multilateral donors contributed 52 percent of total aid Nepal received in last fiscal year and most of their assistance was received in the form of loans ( World Bank— 95 percent and ADB—89 percent).
“These multilateral donors have largely closed the grant window for Nepal,” said Narayan Dhakal, undersecretary at the international economic cooperation coordination division at the Finance Ministry, who coordinated the preparation of the report. “Even countries like Japan have been asking us to take loans instead of grants.”
He said the donors’ focus shifted to loans compared to grants after the Debt Sustainability Analysis by the International Monetary Fund concluded that Nepal is at a lower risk of debt distress.
In the debt sustainability analysis conducted by the IMF in collaboration with the World Bank in February 2019, Nepal’s risk of external debt distress remains low. All debt and debt service ratios are projected to remain below the relevant indicative threshold values.
“Stress tests suggest that the debt burden indicators are vulnerable to growth/export shocks and natural disasters. This underscores the importance of implementing sound macroeconomic policies,” the IMF-World Bank joint analysis stated.
As of the first half of the current fiscal year 2019-20, the country’s debt to gross domestic product (GDP) ratio stands at 31.9 percent (18.87 percent external and 13.02 percent internal ), according to the Financial Comptroller General’s Office, a government agency that keeps records of the government’s income and expenditure.
“Nepali is in a comfortable situation in terms of debt-to-GDP ratio despite a rise in its debt portfolio compared to the grants,” said former Finance Secretary Rameshore Khanal. “As Nepal prepares to graduate to a developing country status from its current least developed country status, Nepal will no longer be able to receive grants after a few years.”
One reason behind Nepal’s progress in debt sustainability is the increased government revenue. For example, Nepal’s revenue to GDP ratio in 2001-02 was just 11 percent. It increased to 24 percent in the fiscal year 2017-18, according to the finance ministry.
So, Nepal kept the minimum threshold of amount to be received as foreign aid, rejecting token assistance, except in emergency situations.
But, the situation was not normal in the early 2000s. At that time, Nepal had been in a huge debt distress situation as its debt to GDP ratio had reached as high as 63.9 percent in the fiscal year 2001-02.
The government didn’t have enough money even to pay salaries and the country as the government was fighting the Maoist insurgency. International creditors like the World Bank and the IMF had urged Nepal to enter into debt relief programs under the heavily Indebted Poor Countries (HIPC) in 2005. “ At that time, we had sought support from the donors without becoming a part of HIPC,” said Khanal.
Bhanu Acharya, former Auditor General told the Post in November last year that Nepal had rejected the donors’ proposal, considering the country’s international prestige. Acharya was Finance Secretary at that time.
After Nepal’s rejection, donors like the World Bank and ADB had started providing only grants until 2012, according to Khanal.
“From 2012- 2016, we received half grant and half loan from these agencies,” he said adding that they have now decreased the grant drastically, citing Nepal’s good debt sustainability capacity.
Khanal, however, said that Nepal should not be worried about the prospects of a rise in its debt as there is a lot of scope for increasing the debt ratio. “We have to receive more loans and utilize the loans in the best possible way by ensuring returns. The loans also forces the government to improve governance as the loan should be repaid unlike the grant.”
When it comes to loans, the government also rejects several conditions that the donors want to provide the loans.
“We have been rejecting the conditions like the requirement of hiring foreign consultants,” said Finance Ministry’s Dhakal. “We also pay more attention to the selection of the project whether the project is productive for loan investment.”