Nepal’s public debt grew by Rs41.25 billion during the first quarter of the current fiscal year as outstanding total debt reached Rs2,340.60 billion, the Public Debt Management Office said.

Total debt accounts for 43.49 percent of the country's gross domestic product (GDP) as public debt against the GDP has been on the rise over the last few years.

Even though the outstanding external debt decreased amid higher debt servicing and limited inflow during the first quarter, the government’s continued borrowing from domestic creditors contributed to a rise in overall debt, the quarterly report of the PDMO suggests.

During the first quarter, Nepal’s external debt decreased by Rs13 billion while domestic debt grew by Rs54.27 billion.

“There has been a rapid rise in public debt in recent years as the country is receiving domestic and foreign debts to meet the resource gap,” said Dilaram Giri, officiating chief of PDMO.

According to the International Monetary Fund, Nepal witnessed a gradual decline in the debt-to-GDP ratio from 35 percent in the fiscal year 2011-12 to 25 percent in the fiscal 2016-17, which is a sign of improving economic health.

Nepal started to take large loans from domestic and external creditors after the country had to undertake post-earthquake reconstruction work starting with the fiscal 2015-16.

Subsequent borrowing for spending to control the Covid pandemic increased the debt burden.

By the end of last fiscal year, the country’s total outstanding debt stood at Rs2,299.35 billion, or 42.73 percent of the GDP, according to the PDMO.

With the government struggling to raise revenue as targeted, it was forced to rely on domestic and external debt to bridge the gap.

Likewise, the government debt liability also increased due to the high cost of raising domestic loans as interest rates soared due to the liquidity crunch in the banking system.

Despite rising debt liability, the government is still not facing debt distress, according to the IMF. It said in May that Nepal’s public debt is projected to stabilise (at about 50 percent of GDP) in the medium term, and present values of both the public debt-to-GDP and external debt-to-GDP ratios are projected to remain below their indicative thresholds.

It, however, stressed that Nepal needed to continue utilising external borrowing at concessional terms as envisaged in the Medium-Term Debt Management Strategy. Nepal’s Development Cooperation Policy has, however, opened the door for taking external loans at commercial terms, too, an option that Nepal has not utilised yet.

Nepal’s Public Debt Management Act caps the external debt that the government can receive. As per the law, it should not be more than a third of the previous fiscal year’s GDP. Officials said the limit was set to prevent the government from making reckless borrowing of external credit.

As of the first quarter of the current fiscal, Nepal’s external debt stands at 21.5 percent of GDP. “We still have margin to grow our external debt,” Giri said.