With the Nepali rupee sinking against the United States dollar, the government has to dish out more in domestic currency to repay external debts as the exchange rate works against it.

During the first quarter of the current fiscal year, fluctuations in the rate of exchange resulted in an exchange loss of Rs5.52 billion, according to the Public Debt Management Office.

At the beginning of the fiscal year on July 16, the exchange rate was Rs128.11 to the dollar. By October 17, at the end of the first quarter, the greenback had risen to Rs132.07.

The value of the Nepali rupee fluctuates together with the Indian rupee to which it is pegged.

According to the Public Debt Management Office, when there is an exchange loss, it does not necessarily mean that Nepal has to pay the entire loss to its foreign creditors. The exchange rate loss is calculated covering the entire outstanding external debt, it said.

“But Nepal had to bear part of the exchange losses in the payments made during the first quarter,” said Hira Neupane, information officer at the Public Debt Management Office.

There was an exchange rate gain of Rs12.51 billion in the last fiscal year 2021-22, according to the office.

When Nepali currency falls against US currency, it means higher inflows of remittance in rupee terms. But it also means more rupees flows out of the country to repay debts and pay for imports.

Though Nepal has debt liabilities in other currencies such as euro and yen, among other currencies, most of the payments need to be made in greenbacks. As the size of Nepal’s external debt is on the rise, the country faces an increased exchange rate risk.

When the country was hit by a deadly earthquake in 2015, Nepal’s debts—external and internal—surged as the country had to spend huge amounts for money on the reconstruction of damaged infrastructure.

More resources were needed to manage the newly-created structures for the implementation of federalism and address the Covid-19 pandemic.

According to the Public Debt Management Office, Nepal’s external debt swelled to Rs1.02 trillion in the last fiscal year 2021-22 from Rs388.76 billion in fiscal 2015-16. External debt rose further to Rs1.05 trillion during the first quarter of the current fiscal year.

The country was in debt to the tune of Rs2 trillion at the end of the first quarter of the current fiscal year.

Nepal’s overall public debt accounts for 41.38 percent of the Gross Domestic Product (GDP) while external debt accounts for 21.64 percent of the GDP.

Nepal’s GDP was worth $36.29 billion in 2021, according to official data from the World Bank. The country’s Gross National Product (GNP) was reported at $40.405 billion.

As per the Public Debt Management Act 2022, the government cannot borrow in excess of one-third of the GDP of the previous fiscal year. This law was passed to ensure discipline in external borrowings.

Despite growing public debt, officials and experts say that the country continues to remain in a comfortable position in terms of the debt-to-GDP ratio.

The government’s recurrent expenditure has been on the rise while its revenue collection has fallen behind, which is expected to force it to take more domestic and foreign loans.

“At the moment, Nepal does not face a great exchange rate risk because of the low interest rate on external loans, most of which have been obtained from multilateral donor agencies,” said Neupane.

Borrowings from multilateral donor agencies such as the World Bank and Asian Development Bank account for 88.78 percent of the total external loans, according to the Public Debt Management Office.