The budgetary allocations for repayment of domestic and foreign debts soared by nearly three times in the last five years.

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 the fiscal year 2016-17. This coincides with a marked surge in public debt over the 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, the debt to Gross Domestic Product (GDP) ratio reached as high as 40.5 percent in the fiscal year 2020-21 from just 22.7 percent in the 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 have higher interest rates, has forced the government to allocate huge amounts for debt repayment.”

The government was forced to borrow more over the last five years because of the post-earthquake reconstruction, fiscal management for the implementation of federalism and the 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 the budget for this fiscal year, said that he had continued the policy of mobilising internal debt only for development expenditure. “The loans will be used in the productive sector,” he had said.

The 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 than 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, the time has arrived for the government to be more cautious about debts from this point.”

According to him, Nepal should not increase the public debt to GDP ratio more than 50 percent. “Only in the times of major crises should we allow the debt to GDP ratio to reach 60 percent,” he said.

According to him, a cushion of 10 percent is necessary so that 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 the 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 that 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 that 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 without the knowledge 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 the economy has been hit hard by the Covid-19 pandemic. In fiscal year 2019-20, the economy suffered a contraction of 2.1 percent.

It is for the first time that the economy saw a negative growth since the fiscal year 1982-83 when the economy had contracted by 2.7 percent, according to the World Bank statistics. The economic growth is expected to remain poor [the final figures have yet to be released] even in the fiscal year 2020-21 which ended in mid-July.

Even though the Central Bureau of Statistics in late April projected that the economy could grow by four percent in fiscal year 2020-21, considering that the second wave of the pandemic would normalize within the first two weeks of May, the government itself admitted that meeting this 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, has continued in some form in most of the districts including Kathmandu Valley.

As a result, the government’s revenue collection also suffered badly in the last fiscal year. According to the Finance Ministry, the revenue collection in the last fiscal year stood at Rs829 billion against the 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 have long repayment periods,” said Khanal.