The government goes borrowing as virus strangles revenue sourcesForeign aid commitments to Nepal in the first two months of fiscal year grow seven-fold.
Hard up for cash after the coronavirus strangled revenue sources, the government is looking afar for capital to stimulate a comatose economy and pay for rising healthcare expenses.
The Finance Ministry said the government managed to garner foreign aid pledges totalling Rs84.07 billion in the first two months of the current fiscal year 2020-21, a near seven-fold increase year on year. During the same period in the last fiscal year, aid commitments amounted to Rs12.35 billion.
Out of the total aid pledged in the first two months of this fiscal, 64 percent is for roads and good governance, 33 percent for energy, 2 percent for education and 1 percent for reconstruction.
Foreign aid commitments to the country in the last fiscal year 2019-20 came to Rs219.88 billion, recording a 59 percent jump year on year.
“The main reason behind the recent rise in foreign aid is higher external support considering the impact of Covid-19,” said Shankar Sharma, former vice-chairman of the National Planning Commission.
“The International Monetary Fund, which used to provide credit whenever the country faced a current account deficit, is now providing emergency credit to Nepal considering the Covid-19 pandemic.”
Nepal has been forced to seek external assistance as its revenue sources are drying up amid the coronavirus pandemic. The higher revenue has been inadequate even to meet the government's recurrent expenditure.
As of October 20, the government's revenue collection stood at Rs180.79 billion while it faced a recurrent expenditure bill of Rs192.91 billion, according to the Financial Comptroller General Office that keeps records of the government's income and expenditure.
In the last fiscal year, the revenue to gross domestic product (GDP) ratio declined for the first time after observing an ascending trend for 10 consecutive years. It decreased to 21.07 percent of the GDP in the last fiscal 2019-20 from 23.99 percent in the previous fiscal.
The federal government collected revenue totalling Rs700.04 billion in the last fiscal year, down from Rs731.37 billion in the previous fiscal, according to the Finance Ministry.
Under the circumstances, the government has been seeking more external aid to bridge the resource gap.
In April, the government looked for additional annual funding from international multilateral donors—in the range of Rs69 billion to Rs104 billion—to cover the increased healthcare costs in the wake of the Covid-19 pandemic.
In August, former finance minister Yuba Raj Khatiwada talked with the World Bank's vice-president for the South Asia Region Hartwig Schafer about Nepal’s need to borrow more funds from the World Bank due to a drop in revenue to finance its economic recovery, implement a new programmes including disaster management, pay for infrastructure projects and prepare for a digital economy.
Even after the earthquake in 2015, there had been a substantial rise in regular aid commitments to Nepal from donors. In fiscal year 2016-17, Nepal received aid pledges worth Rs250 billion.
“Even though Nepal has been seeking increased foreign aid to fill the resource gap during the pandemic, it would be wise not to use foreign loans in emergency response,” said Bidyadhar Mallik, former minister and finance secretary. “The foreign loans can be utilised in developing health infrastructure which will give returns in the long run.”
Nepal has been increasingly receiving more aid from multilateral donors in recent years. “Besides the Nepal government’s appetite for more aid, the increase is also due to a drop in the number of credit receiving countries with several countries elevating themselves to credit providers such as India and China,” said Sharma.
He said that donors also increased aid to Nepal after the formation of a stable government following the 2017 elections. The loan portion in foreign aid has been growing in recent years in response to Nepal’s increased capacity to repay debts, and a global trend of not providing grants and concentration grant assistance to African countries, the Finance Ministry said in its recently released annual bulletin 2019-20.
As a result, the portion of outstanding loans to the gross domestic product (GDP) has swelled. According to the annual bulletin, the country’s outstanding loans (both internal and external) stands at 37.69 percent of the GDP, up from 27.86 percent in the fiscal year 2015-16.
Experts say that current level of debt against the GDP is not a worrying sign yet as there is still scope for Nepal to take more loans.
“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,” Nara Bahadur Thapa, former executive director of Nepal Rastra Bank, had told the Post in August.
Former minister Mallik also stressed that the current level of debt was nothing to worry about. “But we should use the debt in a way that yields results,” he said.
The government has significantly increased external borrowing in recent years as it enlarged the budget size massively. Big amounts were allocated for various infrastructure projects, and the budget allocation for government staff salaries and social security increased. Most of the resources required for post-earthquake reconstruction were also generated from external loans.
“Now the time has come to be careful about selecting projects and completing schemes where foreign loans have been used,” said Sharma. “Now, several projects funded by foreign loans are not being completed on time, and such a trend will lead the country into high indebtedness.”
He said it was necessary to invest loans in projects which can yield a good rate of return. “Otherwise, we will be forced to spend huge amounts of money from our revenue for repaying the loans.