Government looks for more loans as debt balloonsBorrowing from World Bank and others is for capital expenditure and distributive programmes but experts warn it cannot go beyond 50 percent of GDP.
Finance Minister Yubaraj Khatiwada during his regular briefing to the media on Friday spoke at length about his conversation with Hartwig Schafer, World Bank’s vice-president for the South Asia Region earlier that day.
The video conference focussed on Nepal’s needs to borrow more funds from the World Bank in the face of loss of revenue for economic recovery, implementation of new programmes which include disaster management, capital expenditure for infrastructure projects and to prepare for a digital economy.
“Currently we have the largest portfolio of the World Bank that we can mobilise,” Khatiwada told the briefing. “They are related to health and economic recovery and infrastructure development. An assistance worth around Rs 100 billion meant for energy, tourism and some other sectors are also in the pipeline.”
The government signed several loan agreements with the World Bank worth $949 million in the last fiscal year 2019-20 and is negotiating with the World Bank for at least $750 million additional loans in the areas like tourism and urban infrastructure.
These loan agreements and the last week’s talks come as Nepal’s has nearly trebled in the last six years.
Besides the World Bank, it has also sought support from donor agencies like Asian Development Bank, Asian Infrastructure Development Bank, International Monetary Fund and other bilateral donors, as the country faces a resource crunch to revive the economy from the Covid-19 crisis.
“We are very concerned about the foreign aid landscape during and post Covid scenario,” he said during a virtual meeting with donors in April, according to the Finance Ministry statement.
According to the Financial Comptroller General Office, the office responsible for keeping record of income and expenditure of the government, the total debt of the government increased to Rs1.41 trillion at the end of the fiscal year 2019-20 from Rs544.91 billion in the fiscal year 2014-15.
While comparing total debt to the gross domestic product (GDP) of the country, the debt has reached 40.16 percent of GDP in the last fiscal year compared to 25.65 percent of GDP in fiscal 2014-15, the financial comptroller general office said.
“Although the ratio of debt compared to GDP is on the rise, we still have space to grow debt,” said Uttar Kumar Khatri, spokesperson at the finance ministry. “The debt to GDP ratio in Nepal is relatively lower compared to many other countries in similar development status.”
He said that the country would benefit well if the loans could be received at a cheaper interest rate and that could be utilised in activities that contribute to capital formation.
But, experts say that the space of receiving more loans is tightening after the debt to GDP ratio crossed 40 percent. According to the Nepal Development Update, published by the World Bank last month, Nepal’s debt to GDP ratio is estimated to reach 43.5 percent by the end of current fiscal year.
“We are safe till now because the debt to GDP ratio is below 50 percent but the time has now come to be cautious and serious about the debt sustainability of the country,” said Nara Bahadur Thapa, former executive director of Nepal Rastra Bank.
The government has significantly increased external borrowing in recent years as it increased the budget size massively. Big amounts were allocated for various infrastructure projects and the budget for salary of the government staff and social security increased. Most resources required for post-earthquake reconstruction were also generated from external loans.
On the other hand, foreign donors, particularly multilateral donors agencies, have adopted a policy of only providing loans to Nepal in recent years with its relatively low debt to GDP ratio which now has contributed to the sudden rise in Nepal’s public debt.
With revenue drying up due to the impact of Covid-19 pandemic Nepal is asking the development partners to increase lending.
In April, the government had sought additional funding—in the range of Rs69 billion to Rs104 billion— from international multilateral donors per year to cover the increased health care costs in the wake of the Covid-19 pandemic.
Finance Minister Khatiwada admitted in a press meet earlier this month that resource management during the pandemic could be possible due to cooperation from multilateral and bilateral donor agencies including the World Bank, Asian Development Bank, International Monetary Fund, European countries, Japan, South Korea and neighbouring countries.
Thus, on one hand, Nepal is in need of mobilising more foreign loans to fight Covid-19 while, on the other hand, the ratio of public debt is going up rapidly. There is also the need to balance economic indicators and the failure in this would lead to more risk of indebtedness.
“This has given tough time to the policy makers whether to focus on macro-economic management by keeping debt ratio at a comfortable level or take risk to revive the economy,” said Thapa, who had also worked as a policy advisor on macro-economic management at the International Monetary Fund in late 2000s.
High public debt means the government needs to spend a huge amount paying principal and interest, which otherwise can be used in development activities and delivering public services. The burden of debt will be huge for the future generation.
The government on the other hand is confident of securing more debt as problem projects funded with World Bank money have gone down to three from the earlier six to seven.
“Last year we were among the countries that got the best results from World Bank aid,” said Khatiwada Friday.
In the early 2000s when the Maoist insurgency was at its peak, the government’s treasury was under severe duress. But, the country’s debt to GDP had reached as high as 63.9 percent for 2001-02. Senior government officials at that time said there was not enough money in the state coffers to pay salaries to government employees and there was high demand for a budget for security agencies to fight insurgency. But, the high debt ratio was creating trouble.
“Whenever 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 without the knowledge of many people, so that demands for more resources from the security agencies could be avoided,” said former auditor general Bhanu Acharya, who was Finance Secretary in the early 2000s.
Amid requests of the government, multilateral donors started to provide more grants to Nepal which helped ease the situation. The revenue also peaked up after the insurgency was over, which brought down the debt ratio in the following years.
But, in recent years, the debt ratio is also on the rise again. As per the Medium Term Expenditure Framework published by the National Planning Commission, an estimated additional resources of Rs1.72 trillion would be generated as public debt by fiscal 2022-23.
With a possibility of a heavy rise in debt ratio, Nepal may have to raise tax in the future to raise revenue to pay the loans in the future. The World Bank has suggested that interest rates remain low in Nepal to aid economic recovery.
Thapa said that despite the risk of high levels of debt, the country has no choice but to revive the economy first.
‘If we can revive the economy with the use of loans by completing the projects that are in the final phase and investing the amount in creating gainful employment, the debt ratio can be minimised while boosting the economy at the same time,” said Thapa.
But, concerns have been raised over whether the government would opt for loans even in the projects that are politically guided. Loans approved by the World Bank to run the Prime Minister Employment Programme invited scrutiny amid reports that the budget was being allocated for pulling out weeds at roads.
The World Bank last year had approved a $120 million loan to implement the programme which is aimed at guaranteeing a minimum 100 days of paid employment to poor citizens. Amid the pandemic, the government aims to expand this programme to create employment to 200,000 in the current fiscal year compared to 60,000 last year as a large number of Nepalis lost their jobs at home and abroad.
According to the former auditor general Acharya, the loans should only be used in projects that help to generate capital. “It should not be used for administrative works and distributive programmes,” he said.