Nepal’s public debt has slightly decreased in the first quarter of the current fiscal year 2021-22 compared to the end of the last fiscal year, as the government didn’t raise internal loans and instead spent a significant amount in repaying domestic loans in the first quarter.

According to the Public Debt Management Office, the government’s total debt decreased by 0.80 percent to Rs1723.17 billion from Rs1737.08 billion at the end of last fiscal year 2020-21.

During this period [mid July-mid October], the total external debt increased by Rs15.08 billion whereas internal debt decreased by Rs29 billion, leading to an overall drop in the country’s public debt.

This decline in internal debt is due to the principal repayment of Treasury Bonds in the domestic market, the Public Debt Management Office said in its latest quarterly report.

Hira Neupane, information officer at the office, told the Post that the government has raised internal loans citing liquidity crunch in the banking system.

“It is expected to rise further once the government starts raising internal loans in line with the budgetary provision,” he said.

The government had started raising internal loans from early October in the last fiscal year 2020-21. But this year it is already December fourth week but the government has not started raising internal loans.

The Open Market Operation Committee, headed by the central bank deputy governor, in October had recommended that the Finance Ministry schedule debt raising starting mid-November, according to officials at the Public Debt Management Office. But the Finance Ministry is yet to take a decision on the matter.

“There is a liquidity crunch in the market and the government has enough resources in its treasury due to poor government spending. So maybe the government didn’t want to raise internal loans in such a situation so as to avoid paying higher interests,” said Neupane.

Speaking at the meeting of the parliamentary Finance Committee on December 9, Finance Minister Janardan Sharma also made it clear that the government does not have immediate plans to raise internal loans. “Currently, there is no need to raise (internal) loans. We will definitely borrow as and when needed,” he said.

As of December 20, the total government expenditure stood at 24.55 percent and capital expenditure at 6.7 percent, according to the Financial Comptroller General Office, which keeps records of the government’s income and expenditure.

Nara Bahadur Thapa, a former executive director at the central bank, said that there was no need to raise internal loans immediately as the government sits on the piled up resources.

“The government’s revenue collection has remained good so far in the current fiscal year and a large amount of taxes will be collected by mid-January as taxpayers are required to pay income tax at that time,” he said. “If the government cannot spend, there is no point collecting more money through internal loans”

He suggested raising internal debt in the third quarter of the current fiscal year on a small scale and increasing it in the last quarter.

While the delay by the government in raising internal loans has helped reduce the overall debt of the government, the government is in a greater need for increasing external borrowing because of depleting foreign exchange reserves.

In fact, the government has already signed an agreement with the International Monetary Fund to receive $400 million under its Extended Credit Facility.

According to the Nepal Rastra Bank, gross foreign exchange reserves decreased by 11 percent to Rs1244.85 billion as of mid-November from Rs1399.03 billion in mid-July, the beginning of the fiscal year.

It is the fourth consecutive month when foreign exchange reserves have declined amid surging imports and falling remittances, the largest source of foreign exchange earnings for Nepal.

The existing foreign exchange reserves are just enough to cover the import of goods and services for 7.2 months, just above the central bank’s target of maintaining such reserves for sustaining imports of goods and services for seven months.

“In such a situation, borrowing external loans can help the government maintain foreign exchange reserves at comfortable levels,” said Thapa. “But it also depends on the government’s ability to spend the budget because foreign exchange to be received in the form of loans are provided to Nepal as reimbursement of the budget spent by the government from its own resources.”

During the first quarter of the current fiscal year, the government received external loans amounting to Rs19.49 billion. As Nepeal made principal repayment of Rs5.17 billion, net external borrowing in the first quarter stood at Rs15.08 billion.

But the government has targeted to raise as much as Rs283.09 billion through external loans in the current fiscal year, according to the revised budget in August.

“The government has already signed agreements with foreign donors for borrowing more than the target set for the current fiscal year,” said Thapa. “The government still has room to borrow more from donors if it can spend.”